It's now certain that the WTO will not renege on its commitment to lift quotas on textiles and clothing at the end of this year. And it's just as unlikely that anything else will take their place. But there is a chance that China's quest for dominance will come under threat from another source: western consumers with a conscience. Mike Flanagan shares his thoughts.

When the WTO decided in early August not to call an emergency meeting about extending textile quotas, it killed an uncertainty many people had created for themselves - the quite irrational belief that the EU or US would find a way of ducking out of their unwavering commitment to kill quotas this December 31.

But there's another, spurious, uncertainty still floating round the trade; one that a moment's reflection ought to show is based entirely on observers' political naivety.

Wherever in the world you go, someone in the trade will look at you knowingly and say: "Well yes. But they're going to find something else to put in its place."

Now this view flies in the face of everything that's happened in the past year:

  • The WTO meeting at the end of July which reaffirmed all members' commitment to lower import duties on goods like clothes and textiles as fast as possible. Effect: with one exception, no-one's going to put up import duties.
  • The refusal by the EU to accept any petitions for applying temporary quotas against China, and the US' scrupulous adherence to the letter of the rules agreed with the Chinese when it imposed temporary quotas on bras. Effect: the worst the EU and the US are likely to do is impose, for a few years, a temporary annual limit of 7.5 per cent growth on some Chinese or Indian textiles - but only if, and after, Chinese or Indian market share has soared.
  • The refusal by the US Administration to accept any of the petitions from manufacturers to invoke all the powers it has to impose barriers on Chinese imports because of the evidence that the Chinese are manipulating their currency. Effect: there's no point telling the EU or US that some emerging countries are subsidising exports. The EU and US do that all the time.
  • In a nutshell, the comment of one US official to a Financial Times reporter in late July: "US textile companies have had ten years to prepare for quota abolition. If they haven't done so, they can't come crawling to us now for help." Effect: the EU and US just aren't interested in picking an unnecessary fight with the Chinese.

The net, net effect: virtually no-one in Washington or Brussels right now is going to waste energy defending jobs - and there are far fewer of them than the propagandists claim anyway - in our industry (seen as 'sunset' even in countries like Malaysia) when they're more concerned with selling Airbuses or getting paid for non-counterfeit Windows software.

Now there are still a few uncertainties. It's unclear, for example, whether the US will be able to get its Free Trade Agreement with Central America and the Dominican Republic through Congress before (or after) the elections.

We don't yet know how the EU will change its concessionary import duty for poorer countries, or the bizarre Rules of Origin that make it difficult for apparel manufacturers in countries like Cambodia or Bangladesh to make full use of the concessions they're supposed to have. Indeed, in the case of Bangladesh, we don't even know what its government and industry actually want, since the country's textile manufacturers are at odds with the garment makers.

It's also far from certain that the EU will achieve its ambition of a completely duty-free market throughout the countries of the Eastern and Southern Mediterranean by the end of this year.

But, while these uncertainties are an irritation for traders, none of them remotely constitutes a secret weapon America or Europe will invent to replace quotas.

True, the Democrat Presidential candidate John Kerry has put protectionist rhetoric into his recent speeches, branding as traitors US executives who move business offshore. But he has not articulated any policy change he would create to inhibit imports - and showed no dissent either from the MFA agreement or from China's WTO membership when they were first mooted. It would be premature to conclude that, even with a Democrat President, the US would change its policy.

Self-importance, ignorance and confusion
So why the widespread belief in something that obviously won't happen? Well there are a number of explanations:

  • Self-importance. Many people in this industry think they have an importance that governments just can't see. The EU and the US aren't creating barriers to imports of furniture or shoes or any other unregulated industry. Why should textiles be any different?
  • Political ignorance. Governments do what they do as a result of pressure from consumers, charitable lobbying groups, foreign influence, manufacturer pressure groups and the whole history of their party's policy on an issue. Few people in any trade ever really appreciate all the issues that influence their or their competitors' governments.
  • Serious confusion. The real point isn't that western governments will invent new barriers, but that there are already strong barriers to China completely taking over the world's apparel manufacture. They aren't to do with things western governments may invent. 96 per cent of US apparel sales are imported, and the proportion's not that different in Japan or the UK. Why on earth would these countries invent new laws to protect a non-existent industry? They don't bother with similar laws to protect other industries that haven't had quota protection.

But China does face barriers that stem from where China is, what it's capable of - and the fact that the apparel industry isn't a commodity industry. Three are especially important.

1. China's limited competitive strength. The WTO'sª most recent report was widely reported as yet another "China will dominate the world" survey. But it actually argues almost precisely the opposite. It points out that all those endless "over 70 per cent" predictions for China's market share "only tell part of the story, as they are totally driven by changes in relative prices and cost competitiveness."

The report points out - as every retail buyer fully understands - that there are many other factors that matter in an industry like ours.

It concludes:
"There is no doubt that both China and India will gain market shares in the European Union, the United States and Canada to a significant extent, but the expected surge in market share may be less than anticipated, as proximity to major markets assumes increasing economic significance…
"Furthermore, other developing countries are catching up with China in terms of unit labour costs in the textile and clothing sector."

China's a long way from its customers. Mexico and Romania aren't. In a fickle, time-sensitive industry like ours you can never be too close to the market.

2. The climate for business in China. China's second problem is that it is hitting some serious growth problems. With energy demand 16 per cent higher in the first six months of 2004 than in 2003, and exceptionally hot summer weather in the South, China is running out of power. It has taken the unusual step of instructing 3,000 factories in Shanghai to stop production in alternate weeks, and has rearranged its railway schedules to bring coal into the coastal provinces from the country's minefields.

While the apparel industry's concentration on the coast means the rail changes will create little direct disruption, it is reported that rail transport shortages will last up to the cotton harvest, with consequent difficulties in bringing cotton to users.

And as if that wasn't enough, China is hitting some serious credit problems. Although official commercial lending rates in China are 3.3 per cent, interest rates to private businesses have grown to 12-13 per cent.

In May, the National Reform Commission (NRC) instructed banks to tighten loans to textile and clothing companies, pushing some smaller businesses into black-market loans, at rates claimed by Credit Suisse First Boston to be as high as 18 per cent (pretty unexceptional for many emerging-world apparel manufacturers. But the traditionally low cost of working capital in China is actually an essential part of its offer).

By mid-July, payments of $450 million for cotton imports were said to be outstanding, with Australian cotton vendors reporting delays in letters of credit being opened. While a report by the China Banking Regulatory Commission described worrying levels of business-to-business debt in China's textile industry.

However, China's squeeze on smaller companies did ensure substantial drops in bank borrowing, with year-on-year growth in official loans falling from 82 per cent in February to 13 per cent in June, and the NRC advising banks to make loans to textile companies easier. The advice may be too late for many however, with many local stories of textile companies filing for bankruptcy.

3: Can China live with King Consumer? And how well can China respond to customer pressure on working practices? Not pressure from EU or US governments that China can attack by blustering about "unfair protectionist pressure." But pressure from the one force on earth no-one can suppress - least of all unelected, unaccountable tyrants. Fickle western consumers exercising their supreme power to tell all governments - however authoritarian - where to get off. And China's government realises this: which is why it, and businessmen who want to curry favour with it, churn out so much inane propaganda about the issue.

Imagine, for example, that California's gay community decided to agitate for a 10 per cent gay representation in senior management of all companies supplying goods to the people of California.

Gap, and its suppliers, would be high on those agitators' target list. If CALPERS - the pension fund of California's State employees, and a major Gap shareholder - backed that claim, and the San Francisco gay community started picketing Gap's local stores and its San Francisco head office, Gap could well add that to the requirements it makes of its suppliers.

If the Chinese government objected to this requirement, it would have a simple choice. In a world with 300,000 emerging-market clothes factories, you make things Gap's way or no way. If a host government - be it China or be it Fiji - objects, there are a couple of hundred thousand perfectly competent factories in other developing countries that won't.

Fanciful? Well how about pressure over rights in China to freedom of religion or freedom for unions to organise? Or mass consumer boycotts if China chose to massacre its citizens again, as it did in Tiananmen Square in 1989?

Contrary to the fantasies of the activist community, the world apparel industry is a race to the top. Gap, Nike, M&S: they're all in a fight to find better factories. China has no cost advantage over many countries: its perceived advantage is that it responds better, faster, more reliably to the needs of western consumers than many of its competitors. The moment it stops responding to customer demands, it's lost that advantage: it simply becomes another repressive society, like Burma or North Korea that sensible retailers avoid.

China's growing dependence on making brands for western consumers increases its exposure to the kind of pressure western companies like Nike, Shell or Nestle have lived with for years.

Many demands - like safe factories - find China's government on the same side as its customers. But there are a number of activist pressures - like the rights of unions or religions - which worry China, as they risk creating an alternative Chinese power base. Such pressures don't worry China's competitors, like India, whose societies are full of powerful competing groups. But they undermine completely the Party's monopoly control of power in China.

Of course, western customer demands can't be predicted. Most ethical-sourcing demands start off from activist campaigns: some activist campaigns translate into customer or shareholder pressure, and some don't.

Activist campaigns against child or forced labour in this industry, or against unsafe factories, turned into consumer demands very quickly (though, oddly, no-one has raised a murmur against the child labour that's nearly universal in rice cultivation). Activist campaigns about trade-union rights have generally gathered less public support.

And there can be apparent inconsistencies in activist campaigns. Many consumers feel instinctively that clothes shouldn't be made in factories where wages are too low, so they happily pressure western brands not to make clothes in low-wage countries.

But much activist pressure is currently focused on campaigning to keep emerging-world factories open. Whether it's Korea's Dae Joo in Indonesia, or the Dominican Republic's Grupo M in Haiti, activists are lobbying furiously to save factories that six months ago they were campaigning against. Or to preserve jobs in poor countries that other activists are saying shouldn't leave rich countries at all. And my sense is that these campaigns are getting less public support.

Activist campaigns, and activists' success in translating these campaigns into consumer or shareholder pressure, are difficult to predict. Some, like opposition to child labour, actually play to China's strengths, as child labour is very unusual in China.

That's why during the August 2004 Asian Cup football matches in Beijing, China staged widely-televised demonstrations against it. Odd, isn't it, how China campaigns against child labour almost as fiercely as it campaigns against 'hidden protectionism' when westerners push for trade union rights?

But in a totalitarian society like China, many activist demands would subvert the way the State stays in power - unlike, say, India, where managers have been juggling the conflicting demands of pressure groups for as long as anyone can remember.

So next time you read a rant from a Chinese official or writer about "western interference" or "unnecessary intrusions" or "retaining market distortions" take a moment to decode what's being said.

They're realising they've no way of fighting the most implacable foe ever devised: fickle western consumers with a fit of conscience.

China will have to adjust its whole philosophy of government to the unpredictable ethical demands of American and European college students. Or see millions of jobs move back to countries like Bangladesh and Madagascar. And how China responds to western activist pressure is as unpredictable as what western activist pressure will be lobbying for next.

China might not accommodate western customers as nimbly as most of the other 100 developing countries with significant apparel industries. It's further away from customers than Turkey or Honduras, it's fast losing its cost of working capital advantage, and it's far more vulnerable to activist pressure than any free society. It's that consumer pressure that frightens China, not the minor question of legal barriers.

So if you're a buyer, don't bet on China as the dominant source for the future. Those pesky consumers might push you somewhere else.

ªThe Global Textile and Clothing Industry post the Agreement on Textiles and Clothing: Hildegunn Kyvik Nordas.

Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.